ALK » Topics » Background

This excerpt taken from the ALK 8-K filed Feb 12, 2007.

Background

Air Group is composed of two primary operating subsidiaries – Alaska Airlines and Horizon Air Industries. Both of these subsidiaries operate as airlines, although their business plans, competition and economic risks differ substantially. Alaska is a major airline, operating an all-jet fleet with an average passenger trip length of over 1,000 miles. Horizon is a regional airline operating both jet and turboprop aircraft with an average passenger trip length of less than 400 miles.

Since the acquisition of Horizon by Air Group in 1986, Alaska and Horizon have operated independently and continue to have strong, distinct brands. In addition to serving its own markets, Horizon also provides feed traffic to Alaska and frequency in certain low-density Alaska markets for the benefit of the overall Air Group network. Both the feed and low-density flying for Alaska are referred as “incentive markets.”

Under the former arrangement between Alaska and Horizon, if the incentive markets resulted in a loss to Horizon, Alaska would make a payment to Horizon equal to the amount of the loss. Alternatively, if the incentive markets were profitable for Horizon over a specified margin, Horizon would make a payment to Alaska equal to the overage amount. Horizon was also eligible for a quarterly bonus if Alaska posted an operating profit as defined internally. The net payment or receipt was reported in “Selling expenses” in Alaska’s statement of operations. Horizon reported the receipt or payment in “Passenger revenues.” Alaska made incentive payments of $3.7 million in 2006, received incentive payments from Horizon of $1.7 million during 2005, and made incentive payments to Horizon of $13.8 million in 2004. These intercompany transactions were eliminated in consolidation.

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